Standard Chartered Bank Downgrades India Growth Forecast to 6.4%

India's Economic Growth Forecast Downgraded Amid Elevated Oil Prices and Adverse Monsoon

The ongoing West Asian conflict has altered the outlook for the Indian economy, with Anubhuti Sahay, Head- India Economic Research at Standard Chartered Bank, predicting a major blow to India's growth momentum due to the US-Iran war and the resulting crude oil price hike.

Sahay's team has downgraded India's FY27 GDP growth forecast from 7.1% to 6.4%, assuming an average crude price of $90 per barrel. This downward revision is a result of the adverse impact of the ongoing conflict on high-frequency indicators such as new project announcements, cargo arrivals, increased input costs for corporates, and reduced consumption of cooking gas.

While a few sectors have held up well, including electricity, steel, and bank credit growth, the adverse impact on growth, especially on the informal sector, is likely to be more evident when the GDP data is released by the end of this month. If crude prices remain above the assumption, GDP growth is likely to be even lower than the forecast, due to both price effects and supply disruptions.

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The situation is further complicated by the possibility of a weak monsoon this year, which may drive food inflation up. Sahay's team is forecasting a year of higher inflation and lower growth for India, with inflation likely to be higher than the projected 4.7% if inadequate monsoons push food inflation higher amid already elevated energy prices.

In response to the economic challenges, Sahay's team believes that the RBI may prefer to support growth, but any potential collapse in real rates and likely spillover of a weaker Indian rupee on inflation expectations raises the risk of a 25-50 bps rate hike by the RBI. While the base case is one of no change in repo rate, with an unresolved Middle East crisis and likely El Niño year, risks of a hike are increasing.

The consumption cycle in India has not picked up as expected, despite several government efforts. Sahay's team attributes this to low-income growth (3-4% in real terms) and employment creation in low-productivity areas. To revive the consumption cycle, urgent measures are required to create high-quality employment by focusing on ease of doing business, skilling, and a consistent policy framework to raise return on Indian assets for the right global capital allocation.

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